What if Wall Street had been more diverse in 2007? Would there have been a giant housing bubble and subsequent sub-prime mortgage crisis that nearly crippled the US economy? A new study by six academics including professors at Columbia and MIT’s Sloan School of Management shows that when there is more ethnic diversity among traders, there is a greater chance that traders will think more critically, have less of a tendency to take their assumptions for granted and thus price assets more accurately and avoid bubbles. “People like to be with similar others,” says Sloan’s Evan Apfelbaum. “It’s easier and more predictable, but it creates blind spots when you’re in a condition like a stock market.”

Apfelbaum and his colleagues ran two experiments, one in Texas and the other in Singapore. They took participants who had a baseline of financial literacy and put them in simulated markets, telling them to try to earn money by pricing stocks accurately. In each location, there was a group of ethnically homogeneous traders and a group that was diverse. The groups didn’t work as teams. Each trader sat at his own terminal and bought and sold stocks, knowing either that he was part of a homogeneous or an ethnically diverse team. As in a real stock market, the participants could see the bid and ask offers of their fellow traders and what others ultimately paid and received, though individual identities were kept anonymous.

The results were striking. The traders in the diverse group did a 58% better job at correctly pricing assets. In the homogeneous groups, there was a greater tendency to overvalue assets and thus, to cause bubbles. “Traders in ethnically homogenous markets are significantly less accurate, and thus more likely to cause price bubbles,” says the paper. “Diversity facilitates friction. In markets, this friction can disrupt conformity, interrupt taken-for-granted routines, and prevent herding.”

Apfelbaum notes that other studies have shown that diverse groups tend to make better decisions. For instance, in a study of mock juries, researchers showed that diverse juries were more likely to consider alternate perspectives, deliberate for longer and make fewer factual errors. “The simple presence of people who are different and thus may have different assumptions and knowledge makes everyone in the group act differently,” says Apfelbaum.

Research on diversity within teams has revealed a double-edged sword. It can cause conflict but it can also make the team work harder and produce better results. “Diverse teams are forced to think harder,” says Apfelbaum. “They have to exert more social energy. That can be a major asset when it comes to trouble-shooting, risk management and making thorough decisions.”

What this paper makes clear: If the world of stock traders and bankers were more diverse, the markets would stand a better chance of operating efficiently, traders would be more likely to question their assumptions and the odds would be greater that we could avoid or at least reduce the next disastrous speculative bubble.

The paper is published in the Proceedings of the National Academy of Sciences.

In February 2018, I took on a new job managing and writing Forbes' education coverage. I'd spent the previous two years on the Entrepreneurs team, following six years writing for the Leadership channel. My mission with education is to explore the intersection of education a...